Tuesday, July 13, 2010

Debtors v. Savers III - Back to "honest" gold money? Or forward on to Freegold?

But of all the consequences of central banking and fiat money, war is the worst because it exacts the biggest price from citizens and foreigners and everyone else caught in the crossfire. That is why sound money — by which I mean the gold standard — is a key to peace and freedom.

Attractive as it would be to simply take Rockwell at his word regarding his association between the making of fiat money and the making of war (essentially saying that war could be abolished if fiat currency were abolished), history begs us to identify that notion as a utopian falsehood. Two handy examples from very close to home (in space and time) provide the necessary instruction on this point.

1) We launched into the U.S. Civil War despite our being on a bi-metallic (gold and silver) currency system.

2) We launched into World War I despite many of the participants being on a gold standard.

Sure, paper greenbacks and confederate currency came along to prominence in the Civil War, as did the abandonment of the gold standard and implementation of fiat currency in WWI, but this development misses a most important point.

That point being, if the metallic monetary standard fails to prevent the war in the first place, then all subsequent arguments about the nature of money go out the window. Because once a nation deems itself engaged in a struggle for its very survival, there is no power on Earth that can compel such a nation to cling fast to its metallic currency standard if the legislators deem that a fiat currency would be expedient to facilitate the war effort.

Here's the bottom line on it: In the very thick of it, the scale and scope of a nation's participation in war is not limited by the extent of the metal or paper fabric of a nation's currency, but rather by the extent of that nation's real resources. Throughout the affair, the role of money (whether in the form of gold currency or paper) is merely an accounting mechanism that the nation uses in the economic mobilization of its resources and production.

And as it all shakes out, the wealth of a nation in PEACETIME is ALSO determined in very much the same way -- upon the extent of its resources and the efficiency of its production and mobilization of capital. And the role of money is to help organize and lubricate the workings of the economy. To be sure, any gold metal within a nation is counted among the nation's total stock of resources, and very obviously, it need not (and ought not) any more than any other physical resource be enmeshed (underutilized) in the physical makeup of the nation's currency/banking system.

Given the structure of fractional reserve lending as the basis of our monetary system, the cold hard truth is that use of metallic (gold) currency propagates a nasty falsehood -- the coins are just a subset of the entire money supply but it nevertheless causes ill-informed participants to wrongly believe that the entire money supply is "as good as gold".

It is Another cold hard truth for some people to swallow, but in light of the preceding paragraph, the use of a fiat (paper) currency system is a much more honest means to represent the intangible "nothingness" -- the appropriate embodiment of the network of accounting which is the actual basis of a monetary system. [1]

Clearly, the conclusion to be had from all of this is that a nation's monetary/currency system does not represent the wealth of that nation. Money is merely a utility to be used, to be borrowed and spent. Again, think of it solely as a mobilizing lubricant within an economy -- it has value while in use, but none otherwise. The wealth of a nation, and of its people, is not in its artificial money, but rather in its various resources which can be mobilized for both local and international deployment. It makes little sense to "save" money, as money is an ethereal utility which can be mismanaged and hyperinflated into dysfunction.

Because of this difficult truth, "Your wealth is not what your money say it is," as Another used to say. Instead, your wealth, properly measured, is the tangibles you've accumulated, the store of resources you've saved. And among the world of tangibles, gold is globally the most liquid -- the most universally recognized, honored, and accepted.

In time of war, governments may (and history has shown they often do) recognize and declare that gold is too valuable to be wasted underutilized (undervalued) in the representational coinage of national currency. Therefore, fiat currency is adopted, and gold is instead mobilized in its fully-valued form -- a tangible resource uniquely and reliably suitable for any and all international settlements.

Blunt summary:Our monetary system, in an attempt to be HONEST, chooses mere digits and PAPER as its representational currency. And consequently, in an effort to act WISELY, we unabashedly use this currency for immediate transactions, whereas we SAVE for our livelihoods by acquiring GOLD.

38 comments:

TownCrier misses the point. In a fiat money system it is easier too appropriate the resources from the public for the purposes of war as it can be done stealthily, whereas in a commodity based money system the resource mobilization has to be done explicitly which then the public may or may not approve of. In a commodity mmoney system the war mongerers run the risk of their war-based looting scheme exposed and their designs not being funded. Towncrier also mistakenly assumes that wars are only fought for national survival i.e. defense, when in fact most of the wars are started by the ruling oligarchy to enrich themselves. To take an example, try raising taxes on the American public to fund the never ending wars in Iraq/Afghanistan, etc. and see how quickly they WILL end.

BTW, as far as WWI was concerned, at least in the US, the Fed had already been established leaving a totally fake gold-standard in its wake.

Randy’s Blunt summary:Our monetary system, in an attempt to be HONEST, chooses mere digits and PAPER as its representational currency. And consequently, in an effort to act WISELY, we unabashedly use this currency for immediate transactions, whereas we SAVE for our livelihoods by acquiring GOLD.

Right, it’s not about representation but about reflection and reflexibility (1),about the monetary system having reflexes with which to react to changing circumstances.

Here’s how to phrase it;Oil and gas must be billed at their correct "value" in an honest currency and this correct billing must be reflected in FreeGold.http://bit.ly/a1gwXghttp://seekingalpha.com/instablog/121876-ivo-cerckel/39901-gcc-must-peg-single-currency-to-gold

(1)"Reflexibility" should not to be confused with George Soros’ concept of "reflexivity" which is based inter alia on an erroneous interpretation of Sir Karl Popper's concept of "fallibility" and on a failure to grasp the purpose of quantum gravity.seethinking and reality, 6 July 2009 By Ivo Cerckel review ofThe Crash of 2008 And What It Means: The New Paradigm For Financial MarketBy George Soroshttp://www.amazon.co.uk/product-reviews/1586486993SNIPSoros's main purpose in writing this book is to demonstrate the validity and importance of "reflexivity" (page 224) as the element which justifies that the social sciences should use "somewhat" different methods from the natural sciences. "Reflexivity" is a two-way connection between the participants' thinking and the situation in which they participate (page 8). For Soros, knowledge is represented by true statements. But statements and facts do not exist independently of each other (page 8). This results, on the one hand, in the participants not being able to base their decisions on knowledge alone (page 6) and, on the other hand, in misconceptions playing an important role in the shaping of human history (page 216), Sir Karl Popper having demonstrated that ultimate truth is beyond human reach (page 37).

Freegold is about observing and understanding what is actually evolving out of our broken system, partly with an assist from the euro architects, but mostly driven by history. Further, it is about deducing the necessary implications of this process, said FOFOA, July 12, 2010 3:27 PM http://fofoa.blogspot.com/2010/07/debtors-v-savers-ii-foa-retro-house-mix.html

My review of Soros’s book at amazon.co.uk starts as follows:Thomas Aquinas defined truth as ad-equation between the thing and the intellect ("adaequatio rei et intellectus"), the ad-equation between reality and thinking. Soros uses three avenues to introduce his, Keynesian it appears now in the present second edition, intuitions between thinking and reality.

"This means that before guv’mint can play welfare state,before government can deal with the indefinable (1) concept of "social justice"guv’mint must first pay its debts."

I understand your remark now thank you ..... however you also said

"Wendy,Here’s the bottom line:The welfare state needed thalidomide to justify or legitimate itself.Without thalidomide, there would never have been a welfare state."

I am entirely aware of the effects of thalidomide poisoning. It was prescribed in Canada to PREGNANT woman for morning sickness!! It was only good luck that my mother did not suffer from morning sickness when she was pregnant with me and my siblings. There were many others not so lucky!!

However having said that I'm completely confused by your remark that without thalidomide there would NOT have been a welfare state.

Your futher remarks indicate to me that you were poisoned by thalidomide, which makes you an expert soooo.....

Thalidomide is the reason why we would need product-liability laws.Right, strictly speaking, product-liability laws are not part of the welfare state.

However, if you look at what's happening with product-liability laws in so-called courts of law south of the Canadian border, you might start to wonder.Excessive product-liability judgments started in the seventies, that’s right after Nixon broke Bretton Woods.Would juries be able to give such liability judgments, if money had some value?

Here’s the abstract of a 1991 paper;Recent developments in products liability law in the USA http://www.springerlink.com/content/lph112u63k05321g/Abstract The author shows that, after the great evolution of U.S. product liability law in the seventies, a BACKLASH was inevitable. These restrictions are demonstrated by reference to state statutes, court decisions, court procedures, and theories. The author argues that lobbying of powerful interest groups eventually was responsible for stopping and even reversing the expansion of products liability law.

Thalidomide is the reason why we would need product-liability laws.That’s what they say.

Me. born February 1962, says;Thalidomide had been tested before use.Thalidomide was created by the Nazis.Its origins go back to 1938 and one Frances Oldham Kelsey.Thalidomide was marketed since 1957. Kelsey was only appointed to the USA Food and Drug Administration (FDA) after the 30 April- 1 May 1960 Düsseldorf Congress of neurologists warning of the dangers of thalidomide.In 1938 the name of Frances Oldham Kelsey, at the ripe old age of 24, appeared at the FDA in connection with the Elixir Sulfanilamide disaster.Upon Kelsey feigning to ignore the April-May 1960 Düsseldorf Congress, USA president John F. Kennedy honoured Kelsey in 1962 with a presidential award for having saved his country from her product.http://bphouse.com/honest_money/human-testing/

@FOFOA, if I understand freegold correctly, then this means that fiat is for trade/spending gold is for wealth storage.

under such a scenario where the savings of the citizens are secure in the form of Gold, for any politician who is in power, it will be a no risk game to over print the fiat for programs like medicare, medicaid and other such programs and of course for the mother of all programs known as war ?

thank you for the explanation costata, so basically freegold is a gold standard where the currency is not tied to fixed amount of gold ?

So basically if there is too much money printing then the amount of gold backing one unit of a currency will decrease and as governments do quantitative tightening the amount of gold backing a unit of currency will increase, am I getting it correct ?

Following hot on the heels of his blockbuster physical gold ETF, which at times has been trading at a premium as high as 30% over NAV, indicating the willingness of investors to pay over fair value just to know that their asset claims wouldn't be diluted to nothingness on a moment's notice (here's looking at you GLD), the Canadian asset manager is launching a comparable physical ETF, this time investing with silver: the Sprott Physical Silver Trust. This is not looking good for the LBMA and JPM - since the silver market is allegedly even tighter than gold, yet just as manipulated by JPM and the LBMA...

There is NO exit from "unusually accommodative monetary policy" (QE1). FED-Speak = the first 3 Trillion didn't work so let's double-down and try again. After all, it's only printing-press Yankee dollars. The fat lady (QE2) is backstage warming-up. This supports Costata's view of a "floor-price" under gold.

Minutes of the Federal Open Market Committee

However, members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably. Given the slightly softer cast of recent data and the shift to less accommodative financial conditions, members agreed that some changes to the statement's characterization of the economic and financial situation were necessary.

Hopefully those that desire physical silver will sell SLV and buy the new Silver PHYS ETF, thereby increasing the drain on real silver verses unlimited paper.

...SLV is “the main alternate source of storage” of silver and “which accounts for around 50% of world silver inventory”! Wow!

Well, interestingly, he doesn’t get into that whole controversy about whether there is actually any silver in SLV, but he writes that SLV has “been raided heavily over the past seven weeks,” and indeed since February 26, “17.9 million ounces…have been withdrawn from the ETF by authorized participants.”

"basically freegold is a gold standard where the currency is not tied to fixed amount of gold ?

So basically if there is too much money printing then the amount of gold backing one unit of a currency will decrease and as governments do quantitative tightening the amount of gold backing a unit of currency will increase, am I getting it correct ?"

I broadly agree with Angel Eyes but if you wanted to tighten up the definition you could rewrite your comment as follows:

"so basically freegold is a gold-based currency valuation system (delete -standard-) where the currency is not tied to fixed amount of gold ?"

"So basically if there is too much money printing then the (delete -amount of gold backing-) exchange value of one unit of a currency will decrease and as governments do quantitative tightening the exchange value in gold (delete -amount of gold backing-) of a unit of currency will increase,"

Can you see the crucial difference? A standard implies that it is imposed or it is a convention versus a free market discipline.

Also government and/or CBs don't need to hold gold reserves for this system to function. If the citizens of the EMU held 10,000 m/t of gold it would have the same effect as the EMU system CBs holding that gold.

By way of example; if currency speculators tried to artificially drive down the exchange value of Euro, in a Freegold regime, then the citizens could carve them up by exchanging some over-priced gold for cheap Euro.

IMHO India will benefit from Freegold as much, if not more, than a country with large state owned gold reserves. Try tricking one Indian gold owner out of their gold and you may succeed. Would the same trick work on 300 million Indians?

Incidentally, I would like someone to explain how a miner would justify a 5,000% mark-up on "Canada's gold" to Canadian voters when the SHTF. I guess they'll have a shot if political opportunism is dead and buried in Ontario.

The more I reflect on this issue the stronger my belief that countries who don't have gold in the vault, gold in private hands or gold in the ground can still come through the transition OK.

They can simply let their exchange rate float freely and see what "verdict" gold delivers on their economy. For some developing nations capital might flow into their economies based on their economic potential or their good fiscal and monetary policies.

On the other hand if the valuation of their currency is low under Freegold then their ordinary citizens' fate could be dire if they are import dependant in consumption goods or capital or both. Does that sound like anyone you know?

what i am trying to say is if freegold does take place according to the BIS/ECB plan, the same people who didn't care about these metals used as money certainly wont care about gold being money or better yet a wealth reserve.

virtual money is even better for the gov as we all know.

i think most in canada will feel the pain of paper wealth. canadians love real estate but too bad its going to break their hearts and they love rrsp's because everyone knows in 30 years from now they will retire with this plan lol

Costata said:"A standard implies that it is imposed or it is a convention versus a free market discipline."

Indeed. Samix was technically correct, but as you point out, people can (and will) imply the wrong definition via their mental associations with the terms 'gold standard' & 'gold backed'.

Your definition is an excellent one, IMO, and as such, I would like to post it again. Costata & Samix said:"Freegold is a gold-based currency valuation system where the currency is not tied to fixed amount of gold.

Under a Freegold regime gold would value all currencies individually and the exchange value of each currency would still be relative to every other currency.

Eg. Gold gram = Euro 1Gold gram = Yuan 1.5Therefore Euro 1 = Yuan 1.5

It's a triangulation.

If there is too much money printing then the exchange value of one unit of a currency will decrease, and as governments quantitatively tighten the exchange value in gold of a unit of currency will increase."

"in this scenario it will be the same way some money is created today"

I'm not talking about seignorage. I'm talking about gold as the wealth reserve, not a form of currency/money. For example under Freegold net international trade imbalances will be settled in gold or value equivalents.

IMHO Canadians will learn from watching "paper burn" while gold thrives. I predict that then they, and their government, will care about gold in the ground, mon amis.

do you mind giving me your opinion on the following i had asked FOFOA.

what do you think will happen when Gold hits 100% of the ECB reserves. Is it even possible? How much longer can the paper gold price rise before the BIS gets their wish of a physical only gold exchange? like for instance if the paper price of gold does fall to 0 since its a contract market and the ECB currently uses the gold price for MTM, how will they make the gold reserves look like when they have fallen in value substantially. do you think before the comex starts to default we will see other forms of physical exchanges being formed. perhaps this is the new trend that Sprott is starting to form.

I've often wondered how the "mechanics" of the Freegold market will operate.

At my shrimp level I think Zach has it right.

There are many ways that the transition to Freegold could be triggered. As Jim Rickards pointed out:

If ANY credible buyer stands in the market and says "I will buy all available physical gold for a given price, say, US$5,000 or US$10,000" per ounce that would trigger an immediate revaluation.

If hyperinflation hits the US that could trigger a revaluation.

If the Comex declares "cash settlement only" that could trigger the first stage of a revaluation.

IMHO no CB will pick a fight with the BIS if they can avoid it. (According to A/FOA the BIS started the 97/98 Asian currency crisis intentionally.) If favoured "sons" of the BIS are still accumulating gold they may try to hold the price down for some time.

FWIW I don't think we will see the true Freegold price of gold until an official market emerges. By "official market" I think in terms of a BIS-sanctioned market with broad CB co-operation.

There are a number of alternatives to the Comex emerging, Dubai and Shanghai come to mind. The BOE has over 4,000 m/t in custody for clients according to their official statements. I doubt that London will be out of this picture. Zurich has always been a key exchange point.

If the Perth Mint wanted to set up an exchange I imagine that they could do so quite rapidly. They already sponsor ETFs etc. They now own 100% of the Johnson Matthey gold refinery in Australia.

HSBC and JP Morgan have been expanding their custodial operations for several years. Then there is also "hawala" to be considered.

As reported recently the Rothschilds and the WGC have taken a stake in BullionVault.

So what does Ben think the FV of gold is? "If I said gold is to be at 40% just in terms of US encumberment, you can argue for a case of $70-80 trillion's worth of dollars, then we would have a price of $36,000. And if were to halve that, we would have a price of between $10-15,000."

If we see more QE2, if we see more purchases of assets [by the Fed], it would horrendously denigrate the balance sheet of the Fed, which is already not worth the paper it is sitting on, I think in that situation gold is going to be considerably higher."

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